unreasonable for banks to try and get out of TARP free of charge

TO BE NOTED: From the WSJ Via The Epicurean Dealmaker Via Clusterstock:

"Financial Firms Lobby to Cut Cost of TARP Exit

By DAMIAN PALETTA and DEBORAH SOLOMON

WASHINGTON -- The banking industry is aggressively lobbying the Treasury Department to make it less costly for financial institutions to get out of the Troubled Asset Relief Program.

The move could prove controversial for the banking industry, which is busy deflecting criticism about higher fees it is charging consumers for credit cards and other products and services.

At issue are "warrants" the government received when it bought preferred stock in roughly 500 banks over the past six months as part of TARP. The warrants allow the government to buy common stock in the banks at a later date so taxpayers can receive more of a return on their investment when the banking industry recovers.

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Many banks want to return their TARP money and, as part of that effort, want to expunge the warrants. To do that, banks must either buy them back from the government or allow the Treasury to sell them to private investors.

Today, most of the warrants are essentially worthless, because their exercise price is higher than where most banks' stocks are trading. But the government believes the warrants still have value, since they give the Treasury the right to buy common stock at a set price for 10 years.

Bankers say it is unfair to charge what amounts to a "prepayment penalty," which makes it additionally onerous to escape TARP. Bank representatives say the cost of buying back the warrants could be equivalent to paying 60% annual interest on short-term loans. That, they argue, would exacerbate banks' existing problems.

"It is a reduction in capital, and I think it defeats the original purpose of the program," said Bob Jones, chief executive of Old National Bancorp, which has already paid back the government's $100 million investment in the company.

The Evansville, Ind., firm plans to buy back the warrants if it can agree on a price with the Treasury.

To buy back warrants, banks must provide the government with a third-party valuation assessing their worth. If the government disagrees, the bank and the Treasury enter into a negotiation. If they can't agree, the Treasury must try to sell the warrants to private investors.

Bank representatives argue they should be allowed to escape their contractual obligation to buy back the warrants because the TARP itself has also changed, including the addition of compensation rules.

"It's fundamentally wrong and unfair for a contract to be changed that much," said Douglas Leech, chairman and CEO of closely held Centra Bank in West Virginia, which recently repaid a $15 million investment and had to pay an additional $750,000 to extinguish warrants associated with the transaction.

Many more banks have expressed interest in repaying the government aid, including Goldman Sachs Group Inc. and J.P. Morgan Chase & Co.

It is unclear how sympathetic Congress or the Treasury is to the industry's call. The American Bankers Association sent the Treasury a letter last week asking for the ability for banks to be able to withdraw from the program without having to pay "an onerous exit fee."

At a congressional hearing Tuesday, Treasury Secretary Timothy Geithner said he supports the idea of allowing some banks to repay the TARP money because it "helps differentiate, it helps show progress."

Barbara Roper, director of investor protection at the Consumer Federation of America, a consumer group, said it is unreasonable for banks to try and get out of TARP free of charge.

"I don't think they're in a very good position to tell us what they should and shouldn't have to do as conditions to get back the money that hard-pressed consumers are paying to bail them out," she said.

Government officials say they aren't trying to be unreasonable with banks, but that the U.S. wants to make sure it is getting fair value for the warrants.

Write to Damian Paletta at damian.paletta@wsj.com and Deborah Solomon at deborah.solomon@wsj.com"